Alabama

People Pay Taxes

by Dr. Wayne Curtis: As Congress searches for additional revenue to reduce the national debt and the budget deficit, we often hear proposals to increase the taxes on corporations. Such action, the argument goes, will cause the corporations to pay more. And everyone will benefit.
This scenario illustrates a lack of knowledge regarding economics. Unfortunately, economic illiteracy such as this can have dire consequences.
The truth is, people pay taxes. While we impose taxes on corporations—some have clamored for an excess profits tax on oil companies—individuals pay the taxes. How can this be true?
When corporate tax rates are increased, one of several things happens. If competitive conditions allow, the typical corporation will raise the prices of its goods or services. The price hike will be large enough to cover the increase in taxes. And the tax burden is shifted to the consumers who purchase its goods and services.
A second response to an increase in taxes might be to reduce the corporation’s dividends to shareholders by an amount equal to the tax increase. And the tax burden is shifted to people who own shares in the corporation.
If the corporation chose not to take option one or two, a third response could be to reduce its workforce in order to keep its net income the same. And the burden of the tax is shifted to individuals who are laid off.
Economists refer to the incidence of a tax. This is how the burden of a particular tax is allocated among consumers through higher prices, workers through lower wage rates, or other factors of production through lower rates of return.
Suppose our legislature increases property taxes. We know that the property does not pay taxes. The people who own the property incur the cost of the tax.
Unfortunately, far too many people do not make the same distinction when they hear the cry for additional taxes on corporations.
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Wayne Curtis, Ph.D., is on the board of directors of First United Security Bank. He may be reached at wc_curtis@yahoo.com.